Cloud computing is one of the most transformative technologies of our time. Almost every business in the world uses it in some capacity, whether it's to host a website, store data, or even develop software.

Businesses are more conscious about how much they invest in their digital capabilities during this tough economic period, causing the cloud industry to experience a slowdown recently. Nonetheless, DigitalOcean (DOCN -0.12%) is one company in the space that continues to deliver robust growth, even outpacing its extremely powerful competitors.

DigitalOcean's stock remains down 74% from its all-time high amid the broader sell-off in the technology sector. Here's why that presents a great long-term opportunity for investors.

The DigitalOcean difference

DigitalOcean competes with the cloud computing divisions of Amazon (AMZN -2.02%), Microsoft (MSFT -1.27%), and Alphabet's (GOOGL -1.12%) (GOOG -1.06%) Google. Each of those companies is worth more than $1 trillion and, therefore, has considerably more resources than DigitalOcean, which has a market capitalization of just $2.9 billion.

The company operates in a niche segment of the cloud industry, specifically targeting small to mid-sized businesses with fewer than 500 employees.

  • It offers customers personalized support to guide them through their cloud journey, which includes a library containing thousands of digital resources.
  • DigitalOcean's platform is designed with a host of one-click tools to make deployment simple and easy.
  • It has an affordable and transparent pricing structure suited to its target market.

These are features its competitors won't match because they're more focused on serving larger, more complex organizations.

DigitalOcean, on the other hand, is an on-ramp to the cloud for start-ups, and its business model relies on a funnel-style revenue structure. The company has around 614,000 customers, which includes 468,000 "learners" with average monthly spending of just $15.

It relies on a portion of those enterprises becoming "builders," which spend an average of $135 per month. Then, an even smaller portion of those customers becomes successful and transitions into "scalers" with much larger budgets -- DigitalOcean has around 15,000 of those with average monthly spending of $1,962.

The strategy translates into strong revenue growth for DigitalOcean

DigitalOcean is certainly much smaller than the tech giants it's competing with, but it grew faster than all of them in the first quarter of 2023. Its revenue came in at $165.1 million, which was up 30% year over year.

By comparison, Amazon Web Services grew its revenue by 16%, Microsoft Azure by 27%, and Google Cloud by 28% in the same period.

DigitalOcean is also close to profitability on a GAAP (generally accepted accounting principles) basis. While it made a net loss of $34.9 million in Q1, after stripping out one-off and non-cash expenses like restructuring charges and stock-based compensation, it actually generated non-GAAP net income of $28.7 million.

In an effort to manage costs, the company reduced its marketing spending during Q1 compared to the same time last year. Yet it was able to maintain strong revenue and customer growth, which points to the organic demand for its platform.

Why DigitalOcean stock is a buy right now

According to Grand View Research, the cloud computing industry could be worth $619 billion this year, with a 14.1% compound annual growth rate (CAGR) between now and 2030.

DigitalOcean operates in a small segment of the overall industry. It estimates the cloud market for small to mid-sized businesses will be worth just $98 billion this year. However, it's expected to grow at a CAGR of 26% until at least 2026, so this cohort is expanding at a much faster rate than the cloud sector overall. That places DigitalOcean in a position to continue outgrowing its competitors, which means it will increase its market share. Some other reasons this stock is a buy:

  • DigitalOcean stock is down 74% from its all-time high.
  • Its revenue continues to expand.
  • The stock trades at a price-to-sales ratio of just 5.3 right now, which is about one-third of its peak valuation of 15.5 from 2021.

That means investors can buy the stock at a hefty discount to where it was trading just two years ago, yet its underlying business is stronger than ever. That certainly feels like a great opportunity.